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Fears about Europe will again test the markets

Dimitri Messinis/Associated Press

Greece’s finance minister, Evangelos Venizelos (bottom left) and Foreign Deputy Minister Dimitris Donis applauded Prime Minister Lucas Papademos prior to his speech to Parliament.

NEW YORK - For the past six weeks, Wall Street traders have optimistically pushed the Dow Jones industrial average up nearly 4.8 percent on a belief that the US economic recovery is finally gaining momentum.

Today, that cheerfulness will be put to the test as investors balance good news at home with lingering fears over the stability of Europe.

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Yesterday, after three days of rioting in Greece, Parliament approved a new set of austerity measures that are likely to cause much pain for its already-struggling citizens.

The measures clear the way for the nation to reduce its debt and gain another bailout from the other European nations and the International Monetary Fund.

Greeks took to the streets Friday in protest of cuts including a 22 percent drop in the minimum wage. This comes with the unemployment rate over 20 percent and the economy in the fifth year of a recession. Riots and fires continued all throughout the weekend.

The unrest and calls from some European officials for even stricter austerity measures caused widespread selling by investors on Friday. The Dow closed down 89 points, or 0.7 percent. It was the worst day of the year for the market.

Even as the measures pass, Wall Street must ask if the worst of Europe’s troubles are over or if the crisis has just been temporarily delayed.

“Fear is going to be back this week,’’ said Jeffrey Sica, president of Sica Wealth Management. “It’s going to be a very, very volatile choppy week primarily because no matter how this turns out, there’s going to be this aspect of skepticism that’s going to keep investors very quick to sell.’’

Sica said a yes vote means a quick boost for the market before investors remember that Greece has voted for such measures in the past and continually broken its promises to make painful cuts. In his view, this year’s rally is not the result of overwhelming confidence. It is because a fear of Europe’s problems has led investors to US stocks, which are safe by comparison.

“The heart of the issue is the rest of Europe - and the next domino to fall - which is Italy,’’ he added. “You can ignore one small country, but you can’t ignore [the European Union], the second-largest economy in the world.’’

Barry Knapp, head of US equity portfolio strategy at Barclays Capital, is not optimistic about this week, either, but not because of Greece. Knapp said that if any bit of US economic data disappoints, even slightly, the reaction on Wall Street will be bad.

Retail sales and industrial production data along with speeches from members of the Federal Reserve will probably be market movers this week.

“I think we’re in a spot now where the market is just much more prone to disappointment,’’ he said. “The market doesn’t have much margin for error right now.’’

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